Asset Allocation: The rule of 120

I get quite a few questions from friends and family of how much money should be invested in stocks versus bonds. Part of the answer lies in your own risk tolerance and preferences. I found a good rule of thumb that is based on your age and is a great starting point.

The rule of 120:

Basically you take 120 and subtract your age. If you are 25 years old the result is 95. This means that you should have 95% of your retirement assets invested in the stock market and 5% in bonds. This is not a concrete rule just some general guidance.

Using this rule is a good way to slowly make your portfolio less aggressive as you age. Once you hit at 65 you would be invested in 55% stocks and 45% bonds. This is a reasonable asset allocation for someone entering retirement. No matter your age you will have some money invested in stocks to outrun inflation.

This rule is good to use to get a basic idea of how to invest. Once you figure out your own mix you would need to invest in the correct mutual funds to cover all the bases. As long as you have a well diversified portfolio with low expenses you will be on the right track.